Q&As

Are loans normally assigned or novated? Does it matter?

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Produced in partnership with Albert Sampson
Published on: 06 June 2017
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Summary

Both Assignments and Novations of Loan contracts are common. As they have different effects, limitations and risks, whichever mechanism is suitable depends on the purpose and requirements of the transaction. The fundamental difference is that assignment allows the transfer of rights (but not obligations) from one party to another without the consent of the borrower, whereas novation is the extinction and replacement of rights and obligations under a contract with a new agreement and with different parties. It does therefore require the agreement of the borrower.

Assignment

A detailed discussion of assignment is beyond the scope of this note. However, for the purposes of contrasting assignment and novation, the following are the key points.

Types of assignment

There are two types of assignment: (i) legal assignment under s. 136 of the Law of Property Act 1925 (LPA), which imposes formal requirements; and (ii) equitable assignment which is not subject to these requirements.

What rights may be assigned?

The general rule is that a presently owned right (eg

Albert Sampson
Albert Sampson

Albert is a barrister at 4 Stone Buildings practising mainly in the fields of commercial law, banking and financial services law, company and insolvency law and civil fraud. Albert's work often has an international or cross-border element, and his experience includes advising in relation to matters arising in offshore financial centres. Albert's financial services experience includes disputes over: complex structured financial products; capital markets transactions; FX and CFD trading; and the mis-selling of financial products.

Albert was recently seconded to the FCA where he advised on a range of regulated activities, including electronic peer-to-peer lending platforms and collective investment schemes. He is currently a consultant barrister with the National Crime Agency, where he deals with civil asset recovery matters under the Proceeds of Crime Act 2002.

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Jurisdiction(s):
United Kingdom
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Key definition:
Loan definition
What does Loan mean?

An advance of funds from one party (the creditor) to another party (the debtor) for a period of time. The funds can be advanced for an agreed period or be repayable upon demand. Interest is usually paid on the advance which can be secured or unsecured

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